California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

Last April, we reported on a bizarre case arising out of the City of San Clemente's attempt to down zone a piece of property.  The trial court had concluded that the down zoning constituted a taking and ordered the City to rescind a decision supported by that down zoning.  The City had denied an application to develop the property because the application did not conform to the current general plan and zoning ordinance (the City seems to have sidestepped the fact that the development applications included applications to amend the general plan and zoning). 

In addition to a writ of mandate ordering the City to rescind its decision, the Court also awarded damages of $1.3 million, representing the overall value of the property ($2.8 million), less the anticipated cost to build a driveway needed to support its development ($1.5 million).  Following a post-trial motion, the Court amended the judgment to make clear that the City had the choice of either (1) rescinding the denial based on the down zoning or (2) paying the damages award.

Yesterday, the Court of Appeal issued its decision in Avenida San Juan Partnership v. City of San Clemente.  It upheld the writ and the determination that the owner was entitled to a damages award, but it remanded the case for recalculation of the amount of the award.  It's a long, complicated opinion, and we'll just hit some of the high points for now.

Spot Zoning.  The Court held that the City had specifically targeted this property for down zoning, leaving it as an "island" of "minimum lot size zoning in a residential ocean of substantially less restrictive zoning."  It didn't help that the enabling legislation that created the new RVL (residential, very low) zoning had described the zone as intended for preserving "open space in canyons" by rezoning "significant acreage."  The subject property was less than three acres - and not located in a canyon.  This was enough to qualify as "irrational discrimination" under cases such as Hamer v.
Town of Ross (1963) 59 Cal.2d 776 and Arcadia Development Co. v. City of Morgan Hill (2011) 197 Cal.App.4th 1526, 1536.   

Penn Central and "Economically Viable" Uses.  The City argued that its action fell short of a regulatory taking, as a matter of law, because the RVL zoning did not leave the owner with no economically viable use of he property, a fatal flaw under Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003.  The Court held that this view "is too limited," and that a taking occurs where a regulation goes "too far," even if some economically viable use remains.  (See Palazzolo v. Rhode Island (2001) 533 U.S. 606.)   Where this occurs, courts look to the "Penn Central" test, which the California Supreme Court has held contains three "core" factors:

1. The economic effect on the landowner;
2. The extent of the regulation's interference with investment-backed expectations; and
3. The character of the governmental action.

The Court quickly concluded that all three factors "readily appl[ied]" in this case. 

Timeliness.  As we have reported in the past, regulatory takings claims often fail on procedural grounds, either because they are too late, missing the applicable statute of limitations, or because they are premature, failing on ripeness grounds.  (We've even seen cases, such as MHC Financing Limited Partnership Two v. City of Santee, where claims failed because they were both too late - and too early.) 

Here, the City argued that the owner waited too long to challenge the RVL zoning.  The Court disagreed, concluding that the statute began to run on the challenge only when the City denied the owners' development applications in 2007.   The Court went through a painstaking analysis of the difference between "facial" and "as applied" challenges, holding that the owners' challenge clearly fell on the "as applied" side of the ledger, making it timely. 

The City also argued that the owners' claim was not ripe because the owners failed to apply for entitlements to build what the RVL would have allowed them:  a single dwelling.  The Court rejected this argument as well, holding that under Palazzolo, the City's denial of the application qualified as final. 

Damages.  The Court examined closely the damages award, ultimately concluding that the trial court's methodology was flawed.  The trial court had performed a simple analysis, taking opinions of the value of the property absent the RVL zoning, and subtracting out the cost the owners would have incurred to build the (expensive) driveway necessary to support the property's development. 

The Court correctly noted that this methodology ignores the fact that the takings conclusion was premised on on the Penn Central test, not a "no economically viable use" theory.  Because of this, damages had to take into account the fact that the property still has some value, even with the RVL zoning in place:  "A very large taking is not a total taking."

There were a number of other issues addressed in the Court's opinion, including an interesting attorneys' fees discussion, but I think they go beyond the scope of a blog post.   As we digest the opinion a bit further, we'll probably have more to say.

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The use of eminent domain in a declining real estate market presents a number of unique issues.  I often receive calls from property owners who are frustrated with the government's timing of condemnation proceedings, and want to know how they can get market-peak-values for their property. 

This issue was the hot topic of a previous IRWA seminar I chaired, Property Acquisition, Appraisal, and Relocation in an Upside Down Market.  And a recent blog post by the Weiss Serota Helfman law firm, Eminent Domain Valuation in a Falling Market Poses Questions for Condemning Agencies, triggered some thoughts I felt worthwhile to pass along. 

If a government agency has been long-planning to acquire a property, but the proposed project does not go forward for several years, property owners are typically left in limbo with a "cloud" of condemnation hanging over their property.  Sometimes, the agency's actions go too far, and result in liability.  When liability attaches in a rapidly declining real estate market, who bears the burden of the market decline:  the agency, or the property owner?  The answer depends on whether the agency is liable for (i) a de facto taking or (ii) precondemnation damages (or "Klopping" damages). 

• De Facto Takings:  Under a de facto taking claim, the landowner must demonstrate that a government agency’s particularly oppressive acts result in a taking of the property either through a physical invasion or through a direct legal restraint.   In assessing damages, the property is to be valued on the date that the “taking” occurs, and all decline in value after that date is to be borne by the condemning agency.  Since the taking is said to have occurred at this earlier date, damages would include those losses wholly unrelated to the precondemnation activity, such as losses due to a general decline in market value in the area.
• Precondemnation Damges:  Under a precondemnation damages claim, the landowner must demonstrate that the agency has acted unreasonably in issuing precondemnation statements, either by excessively delaying in bringing the eminent domain action, or by other oppressive conduct.  In assessing damages, the landowner is entitled only to those losses caused by the agency’s announcements, and not any decline in market value that is caused by general conditions unrelated to the activities of the condemning agency (i.e., the agency is not liable for any general market declines).

Both claims can be difficult to prove, a de facto takings claim more so.  But in a rapidly declining real estate market, understanding the nuances between the two claims is important, as it can make a significant difference on the amount of just compensation. 

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A new published California court of appeal decision may be important for private utility companies with respect to the valuation of their possessory interests in public rights-of-way for property tax assessment purposes.  The case, Charter Communications Properties v. County of San Luis Obispo, provides that when assessing the fair market value of a utility's possessory interest, the County tax assessor will likely be able to disregard the utility's agreed-upon remaining term of possession and instead assume a much longer anticipated term of possession to match reality.  This, in turn, means private utility companies should expect to see higher property tax assessments.  

Some background:  Under article 13, section 1 of the California Constitution, property is generally assessed as a percentage of its fair market value.  Private possessory uses of public property may also be assessed for property tax purposes.  With respect to private utilities in public rights-of-way, such possessory rights are typically valued by capitalizing the annual rent.  The annual rent is based on the franchise fee paid in exchange for the utility's possessory interest for (1) the remaining term or (2) the anticipated term.

The term of possession therefore becomes very important for valuation purposes, as the longer the term of possession, the greater the present value.  In the past, the assessor typically relied on the franchise agreement between the public entity and the private utility company in determining the remaining term.  As terms came closer to expiration, private utility companies were taxed less and less.  

The Charter Decision:  In Charter, the private utility company had between four and eight years remaining on its franchise agreements with the County for the placement of its television cables in public rights-of-way.  Instead of using this remaining term for valuation purposes, the County assessor instead valued the private utility's possessory interest by assuming a much longer anticipated term of possession (15 years).  

Charter challenged the assessor's valuation methodology, as it resulted in over half-a-million dollars of increased assessment.  Charter claimed there was no basis to deviate from the agreed-upon remaining term and assume a longer anticipated term of possession.  The trial court held that the assessor appropriately relied on an extended anticipated term as opposed to the parties' stated remaining term, concluding that the evidence demonstrated that these types of franchise agreements are routinely renewed indefinitely, and in fact Charter expected its cables to remain in-place indefinitely.

The Court of Appeal affirmed, also concluding it was appropriate for the County assessor to assume a much longer anticipated term for valuation purposes.  Despite the stated length remaining for its franchise term, there was no question that the utility provider would have its franchise renewed and the utilities would remain in place well into the future.  

Private utility companies will now need to seriously analyze their property tax bills and determine the valuation methodology employed by the assessor.  If the assessor deviated from the stated remaining franchise term, the utility provider will need to decide whether the deviation is supported.

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On July 29, 2011, the California Court of Appeal issued an unpublished decision confirming that when condemned property is subject to a roadway easement, and the property owner fails to demonstrate that there is "something special attaching to it," regardless of how the property is ordinarily bought or sold, the landowner is only entitled to nominal value.

In People ex rel. Department of Transportation v. Bakker, No. F060030, the California Department of Transportation (Department) condemned 18.13 acres of land belonging to the Bakkers, 4.4 acres of which were subject to a roadway easement.  After the jury awarded the Bakkers $15,500 per acre, including the 4.4 acres subject to a roadway easement, the trial court entered a directed verdict in favor of the Department, holding that the Bakkers were only entitled to nominal value for the 4.4 acres as a matter of law, and reducing the $68,200 awarded for the 4.4 acres to $200.  The trial court also denied the Bakkers' request for litigation expenses.  

On appeal, the Bakkers argued that they presented proof of special value by way of their appraiser, who also happened to have a broker's license, as he testified that property in the area, regardless of whether it is subject to a roadway easement, is bought and sold based on the gross acreage.  The Court of Appeal first explained, quoting People ex rel. Dept. P.W. v. Schultz Co. (1954) 123 Cal.App.2d 925, that in California, absent "proof of some special value" condemned land subject to a surface easement is only entitled to nominal value.  Then, expressly rejecting the Bakkers' argument, the Court stated that  [i]f the fact that a parcel is usually sold based on gross acreage proved that the portion of the property subject to a roadway easement has special value, the rule set forth in Schultz would never apply."  Accordingly, the Court of Appeal affirmed the trial court's approximately 99.7% reduction in compensation for the 4.4 acres of property. 

As for the issue of litigation expenses, the Court of Appeal found that even though the Department's final offer was only 83% of the revised jury verdict, because the trial court applied established guidelines it did not abuse its discretion in determining that the offer was reasonable. 

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When eminent domain attorneys think of just compensation in the context of an eminent domain case, we're typically thinking about the value of what we can see:  the dirt itself; and anything built on that dirt.  But every so often, a property's real value lies not in what is on the surface, but what sits below the surface. 

A recent post by the Biersdorf law firm, Mineral Rights in Eminent Domain Cases, reminds us about this often overlooked issue.  The post contains a nice summary of when and how these issues can arise, and I won't repeat all of what they have to say.  The bottom line is that when a condemning agency acquires a fee interest, that interest may well include mineral rights that have cognizable value.  Indeed, even if the taking is merely an easement, it is conceivable that the easement could impair the remainder's value by, for example, making mineral extraction more costly - or even impossible. 

But before property owners conclude that this is a potential gold mine (yes, silly pun intended), there are some warnings against thinking you can extract a lot of extra value (see, I did it again) from subsurface minerals. 

First, in order to claim compensation for lost mineral rights, the owner has to actually lose those rights.  It might seem obvious that the property's owner is going to lose his or her mineral rights when the government condemns the property, but this is not always the case.  In fact, in many situations, the fee owner does not actually own the mineral rights.  While it often gets overlooked in the boiler plate of a typical real estate contract, sellers often reserve for themselves mineral rights below large tracts of land when they sell that land off for subdivision and development. 

Second, even if the owner does own the mineral rights, there has to be something there that has real value.  This doesn't mean that you have to have an actual stream of gold running beneath the surface; any number of things can have real value in the marketplace.  (Even something as seemingly simple as clay can have huge market value under the right circumstances.) 

Third, even if something of value does lurk beneath the surface, the owner still must deal with highest and best use issues.  If the minerals can be extracted without interfering with current (or planned) surface uses of the property, the owner should be able to recover both the full value of the property using conventional valuation methodologies, plus whatever added value an appraiser might quantify based on the minerals.

But in many cases, mineral extraction will either preclude other surface uses, or will simply be too costly to implement on a scale as small as a single parcel.  If this is the case, the appraiser would need to determine whether the property's value is greater if converted to a mineral extraction use than it is for any other reasonable use of the property.  This may involve examining possible assemblage to generate the economies of scale necessary to support mineral extraction, and there may be significant legal hurdles to extracting the minerals, even if the costs of doing so can be justified.  (Picture for a minute asking the city council to approve a small oil drilling rig in the front yard of a quiet suburban tract home.) 

Ultimately, this is an issue that arises only rarely.  But when it does, ignoring it can prove extraordinarily costly.  For an owner who doesn't understand these issues, they may lose a huge component of the just compensation to which they are entitled.  And for the government, if they fail to catch a major mineral deposit in their initial analysis of a planned project's cost, they could face a massive claim that can blow the project's budget faster than oil shoots out of a rig that just struck a huge deposit.

Thanks to theBiersdorf firm for flagging the issue; it's certainly a good one for all eminent domain attorneys to keep in mind.  

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In California eminent domain cases (this is an area in which the law varies dramatically from state to state), the property / business owner is entitled to an award of litigation expenses (including attorneys' fees) if (1) it makes a reasonable final demand for compensation and (2) the agency makes an unreasonable final offer of compensation.  (See Code Civ. Proc. § 1250.410.)

How one analyzes "reasonableness" once the jury issues its verdict has been the subject of a number of court opinions.  Tracy Joint Unified School Distract v. Pombo (Oct. 29, 2010) adds to that body of law. 

In Pombo, the appraisers were wildly apart in their opinions of value.  The agency's appraiser opined to a value of around $3 million, while the owner's appraiser opined to a value of around $12 million. 

When it came time to exchange the final offer and demand, the agency stuck to its guns, making an offer only $100,000 above its appraiser's conclusion.  The owner split the difference, making a demand of around $8 million. 

At trial, the jury also split the difference, coming in at almost exactly the number in the owner's final demand.  The owner sought an award of litigation expenses.  The trial court denied the motion, focusing on the standard, three-factor test:

1. The amount of the difference between the offer and the compensation awarded,
2. The percentage of the difference between the offer and the award, and
3. The good faith, care and accuracy in how the amount of the offer and amount of demand, respectively, were determined.

The first two factors were obvious:  no matter how one looked at it, the agency blew it and the owner nailed it.  The decision turned on the third factor, and there, the trial court sided with the agency.  It concluded that the appraisers' opinions were so disparate that it was impossible to know how the jury would view the case.  The court concluded that the agency had exercised sufficient "good faith, care and accuracy" to avoid a fee award.

The Court of Appeal reversed.  It distinguished the cases that had found against the agency on the first two factors but still rejected a fee motion on the grounds that those cases had in common something absent in Pombo:

[Here, t]here was no tricky legal issue or unusual circumstance that made the offer difficult to formulate. The jury was confronted with a straightforward conflict between two appraisers who advocated vastly different approaches to the appraisal process.

In the absence of a "tricky legal issue or unusual circumstance," the Court of Appeal had no difficulty concluding that a fee award was warranted:

[T]he monetary difference between the offer and the award was enormous, the property owners’ offer was extremely reasonable and the District made no effort to show good faith by tendering an offer that gave serious consideration to an adverse appraisal that was several times larger than that of its expert.

Hard to argue with the Court's analysis.  

For more on the Pombo case, see our E-Alert, New Eminent Domain Case Clarifies "Good Faith" Test for Determining Litigation Expenses.

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Another recent interesting court decision was somewhat lost in all the excitement last week over (1) the County of Los Angeles v. Glendora Redevelopment Project case striking down Glendora's redevelopment plan for inadequate blight findings and (2) the US Supreme Court decision in the Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection case rejecting a "judicial takings" claim. 

That recent decision was by the California Court of Appeal in City of San Jose v. Union Pacific Railroad, which came down a month ago, but received little attention as an unpublished decision on a narrow valuation issue.   But on June 11, the Court decided to publish its opinion, making it a whole lot more relevant to us eminent domain attorneys. 

In Union Pacific Railroad, the city sought to condemn an easement across a strip of land owned by the railroad company in order to widen an existing street.  The court held that the railroad was entitled to only nominal compensation for the portion of the property actually used for the rail line, explaining that a special rule applies in such circumstances pursuant to a 1925 California Supreme Court decision, City of Oakland v. Schenck (1925) 197 Cal. 456.

With some thoughtful analysis, it seems pretty clear that the Court got the decision right.  Under the facts as presented in the case, the easement did not diminish the value of the fee given its highest and best use as a rail line, meaning nominal value makes perfect sense -- and constitutes fair market value.  

But the Court apparently found the case to be more novel, concluding that it was bound to follow Schenck, but that the end result was a decision that did not afford the owner fair market value for the property taken.   In my opinion, the Court's analysis is wrong, even though its decision was right. 

For more details about the case, feel free to read my E-Alert, Court of Appeal Holds that a Condemnee is Not Always Entitled to Fair Market Value – But is That Really What the Court Means?
 

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A fundamental premise underlying eminent domain laws is that the owner is treated fairly under principles of just compensation.  This means that the owner receives fair market value for the property being condemned.  And, where there is an active, relevant real estate market with ample comparable sales data, this premise can be upheld through traditional appraisal methodologies. 

Unfortunately, not all markets include legitimate, open market transactions from which to gather comparable sales data.  This is especially true where market conditions have deteriorated; in other words, the very conditions that exist today.   I have spoken on this subject several times in the past couple of years, but I believe many still do not understand the full impact of how current market conditions impact eminent domain cases.

Alan Ackerman, a Michigan eminent domain lawyer and editor of the National Emient Domain Blog, wrote a recent article in RE Business Online entitled Determining Fair Market Value which addresses just this issue.   It walks through the concept of fair market value and the problem current conditions create.  He explains:

Because most jurisdictions identify a specific date for the transfer of title and property values are subsequently assessed based on that specific date, there is greater potential for an artificially low value assessment based on what may be an unfavorable “snapshot” in time. 

In other words, condemnees are penalized because they are forced to sell at a time when no reasonable seller would do so.  And, exacerbating the problem, the data one typically finds around those dates of value represent distressed sales, for which one could reasonably argue there never is a true, willing seller.  But, where that tainted data is the only data that exists, appraisers will often use it to establish value.  Mr. Ackerman concludes:

Fundamentally, the underlying premise of fair market value is that property is sold without compulsion. To conclude that the sale must be made on a particular date could, for many owners, severely endanger the opportunity to receive just compensation, simply because they are not willing sellers in the marketplace.

Yes, market conditions will change, and this problem will go away.  In the meantime, however, we will continue to struggle with assessing fair market value where the date of value falls during a severely depressed market. 

There is one potential bright side for those practicing eminent domain in California.  We have a statute designed to deal with situations in which no "relevant, comparable market" exists.  Code of Civil Procedure section 1263.320 allows compensation to be established by "any method of valuation that is just and equitable" in such situations.  This should provide appraisers with the flexibility necessary to adopt creative valuation scenarios where market conditions do not provide adequate, untainted data.  How far courts will go in allowing appraisal testimony that does not follow traditional methodologies under the auspices of section 1263.320 remains to be seen.

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Just a few weeks ago, we reported on Tulare County's plans to condemn a number of properties to facilitate the widening of Road 80.  Now, Visalia Times-Delta reporter Valerie Gibbons reports that Tulare County is considereing condemnation for four additional parcels, this time to facilitate the widening of Road 108 (or Demaree Street) between Visalia and Tulare. 

The November 11 article, "Board of Supervisors moves to seize land for Road 108 project while still in property negotiations," explains that both the Road 80 and Road 108 projects raise the same concerns from property owners:

In both cases, the widening projects will be affecting farmers who say the county isn't offering enough money to stem losses from lost product, moving fences or taking out equipment.

With these new cases, Tulare County will have filed 21 eminent domain actions for the projects, which are being funded -- at least in part -- by government stimulus dollars. 

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Eminent domain lawyers who practice in Los Angeles County Superior Court are all familiar with LA County's detailed local rules on eminent domain -- "Chapter 16."   Chapter 16 is the chapter in the Los Angeles County local rules that deals specifically with eminent domain, and it contains meticulous procedural rules for the conduct of condemnation cases in Los Angeles. 

Key provisions involve an elaborate "First Pretrial Conference" requiring a substantial, joint written submission to Department 59 (the LA County eminent domain department), along with detailed expert exchange requirements that go well beyond the Statement of Valuation Data required under California law.  (The state-wide requirements for the contents of a Statement of Valuation Data appear in Code of Civil Procedure section 1258.260.)

Last week, Commissioner Mitchell held a meeting of local eminent domain attorneys to discuss proposed changes to the local rules for eminent domain [PDF].  A key purpose of the meeting was to obtain input from the attorneys who live with these rules every day about the proposed changes. 

At this point, nothing has been decided about any changes to Chapter 16; indeed, the next step may involve the formation of a small committee to analyze what changes are appropriate.  However, the proposal and the discussion at last week's meeting are informative.   Indeed, the very fact that the court is taking into account the views of the eminent domain attorneys who will be most affected by any changes that occur indicates the process is likely to be well thought out. 

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On Tuesday, the City of Lake Forest voted unanimously to move forward with plans to condemn a 6.11-acre parcel to use as a land swap with the County of Orange.  The property will likely end up being incorporated into Whiting Ranch Wilderness Park. 

According to Orange County Register reporter Erika I. Ritchie, in her November 4 article "City moves forward with seizure of family's land," the property's owner, the Hernandez family, has resisted all efforts by the City to acquire the property voluntarily.   But the City needs the property to complete a land swap with the County that will facilitate the City's plans for a sports park:

[C]ounty officials have agreed to a land swap that will provide the city with more space for its proposed sports park and the county with an added parcel to become part of Limestone-Whiting Wilderness Park.

The real issue, as is most often the case when the government resorts to eminent domain, appears to be money.  The Hernandez family believes the property should be valued for a commercial use, and claims that such properties are selling for $25 to $45 per square foot.  The City's appraiser has apparently concluded that the property's highest and best use is not commercial, as the City's offer is purportedly for only $3 per square foot.

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In his September 16 article entitled “DWP outmaneuvered on Kern County land purchase,” Los Angeles Times reporter David Zahniser described a story full of political intrigue. It seems someone with ties to Mayor Villaraigosa acquired a property out from under the Department of Water and Power (“DWP”), only to immediately offer to sell the property to DWP at a hugely inflated price. While the article focuses mainly on the political aspect of the situation (e.g., did the buyer know about DWPs plans for the property when it purchased it, etc.), the eminent domain angle is also interesting.

The property, known as Onyx Ranch, encompasses about 68,000 acres east of Bakersfield. It has long been viewed as a potential site for a wind farm, and the DWP sought to acquire it for that purpose. As DWP was working on obtaining control over part of the property through a partnership with Padoma Wind Power, J. Ari Swiller stepped in an bought the property for $42 million. Even before closing escrow on the purchase, Swiller offered to sell part of the property to DWP for $65 million. When DWP balked, Swiller sold the property to the City of Vernon (which has its own electric utility company). Now, DWP must contemplate condemning the property from Vernon if it wants to proceed with the wind farm.

Stripping away the politics, this situation highlights a precondemnation strategy that landowners can sometimes use. By knowing an agency’s planned condemnations in advance, sophisticated landowners look for opportunities to purchase properties ahead of the condemnation. Where they can negotiate a great deal or, more typically, where they can assemble multiple parcels to create a more valuable highest and best use for the combined parcels, they can reap huge rewards. With a known government buyer waiting in the wings, such property “flips” can be quite profitable. Of course, as with all high reward strategies, this gambit comes with considerable risk:

1. The government’s plans or funding may change, and the intended condemnation may never materialize, leaving the owner with a property he or she probably never wanted in the first place, facing the prospects of looking for a buyer that may not exist.
2. Such purchasers must buy knowing they are walking into a lawsuit against the government, a though many may find unappetizing.
3. The government holds a significant ace up its sleeve any time an owner tries to hold it hostage by charging far more than a property is really worth because it knows the seller badly needs it. In the “real world,” sellers in such situations can command huge premiums, because a seller who must have a particular property will pay far more than its “fair market value.” When the purchaser is the government, it can largely ignore such demands for premiums, knowing it can condemn the property at its fair market value.

In the end, while this landowner strategy can (and has) been used quite successfully in some circumstances, it requires a sophisticated landowner and an initial seller willing to sell for far less than what the buyer thinks will be its fair market value when the government comes calling.

Photo credit: LA Times

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